What can we expect in comming years?

SOUMITRA SHARMA, BUSINESS ANALYST, EVALUESERVE
Private labels are products that are manufactured by the retailer itself, rather than a manufacturer who generally markets them through separate retailers. As is evident, private labels are mostly prevalent in organised retail. Europe is the largest market for private label products globally. Within Europe, the United Kingdom is the largest private label market by size, followed by Germany. Private label penetration in the United Kingdom is close to 37 per cent currently, and is forecast to exceed 40 per cent by 2011.


The UK private label market: Key success factors

The most important factor that promotes private label growth is retailer concentration. Retailers of private labels can compete with giants such as Coca Cola and Procter & Gamble, only if they have a national footprint and sufficient market share. This is the reason that the fragmented retail scenario in the United States has been unable to match the United Kingdom in terms of private label growth. The UK retail market is consolidated, with the top four retail chains such as Tesco and Sainsbury occupying majority of market share. This gives them enough presence and resources to compete with manufacturers of established brands, in aspects like advertising, innovation and supply chain.

Another important success factor has been the dynamism and innovativeness of UK retailers. Faced with intense competition from other players, they have continuously re-invented themselves, and modified products to suit changing consumer demands A case in example is Sainsbury, which in face of increased competition from Tesco, changed its private label image from ‘low price' to ‘premium quality' in the food category. The diversification of UK grocery retailers into other categories also provides an instance of this dynamism.


The success of private labels in the United Kingdom can be gauged by the fact that consumers have started accepting private labels in the ‘premium' category. Private labels have consistently emerged on top in terms of quality, in various consumer surveys. In the United Kingdom consumers associate private labels with innovation, and have very strong private label loyalty.

Figure 1: Private label matrix – Position of India vis-à-vis UK


Key expected trends in the Indian private label market: Mapping against the UK

The retail industry in India is still nascent, as compared to matured markets such as the United Kingdom. The retail market in India is currently estimated to be close to USD 200 billion. This is expected to grow at more than 40 per cent per annum during 2007-09. Unlike the United Kingdom, the Indian retail industry is highly fragmented. Organised retail constitutes a meagre 3 per cent (USD 6.4 billion) of the retail market in India. Its share is estimated to reach 9 per cent, or USD 23 billion, by 2010. As indicated by these figures, organised retail would still be a marginal component of the total market in the near future.

Figure 2: Private label maturity curve


Based on analysis of the Indian retail industry, along with mapping it against matured markets such as the United Kingdom, expected future trends in the Indian private label market have been isolated. These are discussed below.

Structure of Indian retail is intrinsically not amenable to private labels

Private labels constitute less than 5 per cent of the total Indian retail market. As discussed earlier, a key factor for growth of the private label market in any country is sufficient penetration and muscle of organised retailers. The highly fragmented nature of the Indian retail market makes it intrinsically unsuitable for private labels. Further, most organised retailers today have a far better regional presence, as compared to a national footprint. Although most players plan to ramp up their national presence as part of their future strategy, there are several hurdles in the way. These include factors such as real estate and distribution costs, regulatory issues, and lack of skilled manpower.

Therefore, unless major Indian retailers ramp up their national presence and attain sufficient penetration and resources, the private label market will not take off in India.



Lack of retailer sophistication could hamper private label growth

There is lack of supply chain sophistication among Indian retailers. Most retailers still exchange information manually with suppliers. Indian retailers are yet to implement bar-coding techniques properly, let alone sophisticated technologies such as radio frequency identification (RFID). There is also a lack of integrated IT systems, coupled with low overall IT spending. As is evident, Indian retailers have a long way to go before they can be compared with international retailers such as Tesco and Wal-Mart, in terms of technology and supply chain sophistication. Therefore, unless retailers pay attention to these issues, they will be unable to develop successful private label portfolios.

Rural areas unlikely to be tapped by private labels in the near future

While it is widely acknowledged that the ‘real' potential in Indian retail lies in rural areas, the rural retail scenario continues to be unorganised and highly fragmented. While FMCG manufacturers – such as Hindustan Unilever and ITC – continue their efforts to solve the rural ‘retail jigsaw' through projects such as Shakthi and e-Choupal, major retailers have tended to stay away from the rural scene. In light of high access costs due to infrastructure bottlenecks, along with absence of a successful rural retailing model, the above trend is likely to continue in the coming years. Therefore, the Indian private label market is expected to be largely confined to urban areas (metro cities), with some growth also coming from semi-urban areas (tier II towns).

Psyche of the urban Indian consumer is both a hurdle and an opportunity

In an ACNielsen consumer survey in 2005, only 56 per cent Indians agreed that private labels are a good option in comparison with brands – as against four in five consumers in developed countries. Further, the same survey also concluded that a majority of Indian consumers associate private labels with low cost, and are, therefore, apprehensive about compromising on quality. The target segment for organised retail in India is still predominantly urban, and in the context of private labels, it is more inclined towards ‘upwardly mobile' urban consumers. This segment gives high priority to quality, and the ‘budget label' perception does not help at all.

Further, Indian retailers have not been able to develop a bond with consumers. Consumer loyalty has been seen to provide impetus to private label growth in developed countries such as the United Kingdom. The lack of this bonding and loyalty could hamper private label penetration in coming years.

At the same time, though, the Indian consumer's psyche also provides an opportunity for retailers. The Indian urban consumer is price-conscious, but also expects high quality. Private label products could actually fit the bill perfectly. If Indian retailers are able to achieve high quality, while controlling costs, their private labels can successfully meet the demands of the Indian consumer.

Intense competition in Indian retail could provide impetus to private labels

With the entrance of several corporate majors such as Reliance, there is intense store-level competition in the current Indian retail scenario. However, if Indian retailers were to follow the UK model, this could actually turn out to be a boon for private label growth. Major UK retailers such as Sainsbury and Tesco have successfully used private labels to differentiate themselves. This scenario could be replicated in India in the near future.

Private labels likely to exhibit maximum penetration in ‘food and groceries', ‘clothing' and ‘consumer durables' segments

All segments where percentage of organised retail is relatively high, and which are also exhibiting the highest overall growth rates, are most likely to show maximum private label penetration in the near future. The following figure illustrates the findings of a simple analytical model based on the above two assumptions.

All segments where percentage of organised retail is relatively high, and which are also exhibiting the highest overall growth rates, are most likely to show maximum private label penetration in the near future. The following figure illustrates the findings of a simple analytical model based on the above two assumptions.

Figure 3: Private label penetration by category
Of course, this model assumes that the Indian buyer doesn't have any bias towards private labels in any particular category. However, practically speaking, these biases do exist and are, therefore, bound to affect the penetration in certain categories. For example, an ACNielsen consumer survey in end-2005 showed that Indian consumers might not be too comfortable with private labels for products such as baby food, shampoo, etc.



Ability of retailers to innovate likely to drive future growth of private labels

The main USP of private labels is their customisation according to user demands. They are then promoted by various means including innovative packaging, promotional schemes, and placement within the retail store. Therefore, success of private label retailers globally has been dependent on their ability to innovate in all aspects of a product - formulation or ingredients, supply chain, packaging, advertising, promotional schemes, and so on. The dynamism of private label retailers, in responding to changing consumer needs through suitable modifications, is also critical. In light of the intense competition in Indian retail, coupled with the choosy Indian customer, future success of private labels would depend on the ability of Indian retailers to innovate. This is again a question mark, given the reputation of Indian companies as poor innovators.


Time will tell

No one can deny that the Indian retail industry is one of the most attractive globally. It is still at a nascent stage, and holds a lot of promise for the future. It is also certain that private labels will continue to increase their share in Indian retail, and are expected to play a key role in every Indian retailer's future strategy. However, under the prevailing circumstances, private labels are unlikely to take off in a big way in the near future.